Debt seniority and mergers

Abstract

Purpose – The purpose of this paper is to show how corporate policy with respect to the seniority structure of debt changes after a merger. Design/methodology/approach – The author uses data on the seniority and other properties of outstanding bonds of acquiring and target firms before mergers and of the combined firm after the merger. The author tests whether a combined firm that has acquired junior debt in the merger attempts to move toward the senior-only structure of the acquiring firm before the merger. Findings – The author finds that acquiring firms do not rapidly move back toward that structure after acquiring senior debt. Research limitations/implications – The results of this study are consistent with those of many recent studies on capital structure, which find that changes in capital structure tend to persist, and that firms are slow to revert to previous structures aftershocks, such as those that may result from mergers. Practical implications – The paper suggests that there may be an advantage for firms to sell off acquired junior debt after a merger. Originality/value – This paper extends previous studies of capital structure to the more detailed level of debt seniority structure.